Congratulations! You’ve made the decision to transition your business and move on to the next chapter of your life.
Among the many questions you’ll need to answer is – how much? At what price are you willing to sell your business?
You’ve probably heard the “rules of thumb” that suggest your business is worth one year of sales or three to five times your EBITDA, right?
Take a quick look at your earnings right now.
What’s the difference between three times your EBITDA and five times your EBITDA?
Whatever your numbers are, the difference in price is significant, especially to you.
What Would a Buyer Pay?
Of course prospective buyers are starting the same place you did, taking a look at your annual revenues and earnings.
While you are looking for reasons to support a higher price, they are looking for every reason to substantiate a lower purchase price.
Your desire to move from 3X EBITDA to 5X EBITDA or more and their desire to move from 5X EBITDA to 3X EBITDA or less doesn’t get either of you closer to transitioning your business.
So, how much is your business – or any business – worth when it is time to transition?
Your business is worth the price a qualified buyer is willing
to pay for it … when you are willing to sell at that price.
Any other number is just that – only a number!
A Business is Not a House
If you are selling a house, there are many features that make it easy to compare, such as the lot size, square footage, number of bedrooms, number of bathrooms, with or without pool and other common elements.
Of course your neighborhood matters too, but your desired sales price is heavily influenced by the comparable price of homes sold recently in your neighborhood. You may get a little more or a little less based on the special touches you’ve given that transformed your house to a home, but most homes are easily tethered to the comps.
Selling your business is not like selling your home. A Business Broker can look for similar businesses in your industry and apply the rules of thumb to set a price. But finding another business just like yours in your location with the exact combination of unique performance elements is somewhere between slim and none.
No, you are not tethered to the comps when selling your business. You can maximize the value you get from all of the special touches you’ve given your business over the years.
How many ways can you differentiate your business and maximize your value?
- Legal – demonstrating your power position in your contractual relationships or through protected intellectual property
- Marketing – differentiating your business, products/services, pricing, promotion, distribution and selling strategies
- Technology – maintaining up to date and innovative technology to distinguish your business and your capabilities
- Operations – demonstrating your operational effectiveness through policies, processes, procedures and productivity
- People – building a productive and engaged work force with minimal turnover, especially among key people
- Financial – generating better than industry average returns and a strong financial position
All of these internal factors are vitally important in maximizing your value. But there is even more you can do by looking at external factors affecting your business:
- Economic – demonstrating your economic power with customers, suppliers, people and capital
- Market – demonstrating industry and market trends and opportunities for growth, as well as barriers to entry
- Regulatory – addressing how you handle current and potential regulatory requirements
- Competitive – documenting your competitive advantages and how you beat each of your competitors
- Supplier – demonstrating the strength of your supplier relationships and capabilities
- Customer – presenting the strength of your customer relationships for future repeat business
When we work with clients to complete Phase I of their Business Estate Plan, we draw out all of these distinctions to maximize their value and get the best possible price for their business.
If transitioning your business at a higher “X” EBITDA is important to you, contact us today for a free consultation.
Founder & Chief Executive Officer
Alex has advised hundreds of small businesses on strategic planning, business development and all areas of corporate finance, specializing in helping business owners sell their business or raise capital for growth and acquisition. In his work with business owners, he has found many have done very little planning for an eventual transition away from the day to day operations or out of the business altogether.
As a native Arizonan, his passion is working with and advising local companies and helping business owners gain comfort in their eventual retirement and have the knowledge that when the time comes to sell the business they have a well designed plan of action already in hand, a good idea of what that business is worth, and who the next owner will be. He founded Arizona Business Transitions to assist business owners plan for an exit or transition, even if that transition is not on the horizon.
Alex graduated from Brophy College Preparatory and later graduated from DePauw University with a degree in Economics and Management. He is a member of the Tempe Diablos Charities and lives in Tempe with his wife Trish and two boys, 10 year old Carter and 7 year old Aidan.